Is Janet Yellen About To 'Go Carney'?

United States Federal
Reserve Chair Janet Yellen speaks at the 2014 National
Interagency Community Reinvestment Conference in Chicago, March
31, 2014.REUTERS/John
Gress

The Fed's next monetary policy decision is today, and one of the
questions going around is whether Fed Chief Janet Yellen is going
to go "Carney" or maybe even "The Full Carney."

Last week, Bank of England chief Mark Carney warned that interest
rate hikes could come sooner than markets currently expect.

Specifically he said:

The MPC’s current guidance makes clear that we will set monetary
policy to meet the inflation target while using up that spare
capacity. This has implications for the timing, pace and degree
of Bank Rate increases. There’s already great speculation
about the exact timing of the first rate hike and this decision
is becoming more balanced. It could happen sooner than markets
currently expect. But to be clear, the MPC has no
pre-set course. The ultimate decision will be data-driven.

So the big question is whether Yellen says anything similar.

In a note to clients, Citi's currency analyst Steven Englander
asked: Will FOMC/USD have a Carney/GBP
moment?

For those not up on their jargon and acronyms, the question is,
will the Fed cause the dollar to spike the same way Mark Carney
caused the spike in the British pound in the immediate aftermath
of his comments?

Englander thinks that any indication from Yellen that the
tightening in policy could come sooner than expected could have a
dramatic effect on currency markets. As evidence, he points to
today's currency reaction from one hot inflation report.

Note the kicker to Englander's comments here:

Today’s FX intraday trading pattern shows G10 having been
relatively resilient, with only AUD dropping by more than 0.2%
since the inflation release. By contrast EM high yielders have
come under significant pressure with MXN, TRY, ZAR and BRL all
down by 0.4% or more. US 2yr yields are up 1 bp, but 5yr yields
are up 5bps. Fed funds now fully prices in a hike at the July
2015 meeting, whereas that hike had been about 80% priced in
earlier this week. Dec 2016 yields have gone from 1.75% at the
end of last week to 1.83% today. Equities are up on the day so
and flat since the CPI release (as of 1PM EDT). G10 FX volatility
is close to long-term lows and has not been affected by today’s
data. Fixed income volatility is up a bit and the VIX is down.
These FX and rate moves are significant but not
overwhelming, so were the FOMC to really signal a fundamental
shift in its thinking, the word ‘carnage’ would not be
inappropriate.

Meanwhile, UBS (via @fiquant)
asks whether Yellen might pull the "semi-Carney." Their view is
that nothing is likely, but there's a shot that the FOMC does
something interesting to deviate from the boring
consensus.

Anyway, we think "Going Carney" is going to be a useful term for
awhile, because it's the perfect phrase to describe unexpectedly
hawkish comments coming out of nowhere. And at some point it
will happen, so be ready for that.